John Kennan

The Employment-Real Wage Relationship: An International Study

The neoclassical and Keynesian theories of employment both predict an inverse relationship between employment and real wages in the short run. The observed correlation between employment and real wages, however, has usually failed to conform to this prediction. Dunlop (1938) and Tarshis (1939) reported a positive correlation between real and money wages which, given procyclical movement of money wages, was interpreted as evidence against the theoretical prediction; the statistical significance of these results was, however, challenged by Ruggles (1940) and Tobin (1948). More recent studies by Kuh (1966) and Bodkin (1969) failed to detect a significant relationship between real wages and employment. These findings stimulated a series of contributions by Solow and Stiglitz (1968), Barro and Grossman (1971, 1976), and others, developing alternative models not apparently refuted by the evidence. Barro and Grossman recast macro theory under the assumption that markets did not clear; Modigliani (1977) argued that the observed relationship between employment and real wages could be accounted for in an oligopolistic model of firm behavior. Thus both the competitive and equilibrium assumptions of the classical model were diagnosed as the sources of its apparent empirical refutation.

Chapter 19 The economics of strikes

Publisher Summary This chapter discusses the prospects for constructing a theoretical explanation of strike activity and reviews the evidence that strikes are systematically related to other economic variables. The economic analysis of strikes begins with the “Hicks Paradox”: it is impossible to build a bargaining model in which each side behaves optimally but the outcome is not Pareto optimal. This paradox can be circumvented in several ways. It is assumed that only one side behaves optimally. The joint cost theory treats bargaining as a black box, and it is assumed that there is a tendency toward Pareto optimal outcomes, which is stronger when strikes are more expensive. The private information theory is based on the idea that strikes are Pareto optimal after all, when incentive-compatibility constraints are taken into account. It is difficult to assess the extent of empirical knowledge on economic aspects of strikes.

THE DURATION OF CONTRACT STRIKES IN U.S. MANUFACTURING

This paper develops new evidence on the hazard function for strike duration, and on cyclical changes in this function, using data on contract strikes in U.S. manufacturing industries. A flexible duration model is estimated, and it is found that the hazard rate is generally a U-shaped function of strike age. The level of industrial production is found to have a significant positive effect on the hazard rate: strike duration is countercyclical. A convenient parametric model of heterogeneity and duration dependence is introduced, in which the logit of the hazard rate is a polynomial function of strike age, up to a random individual effect drawn from a beta distribution. Estimates of this ‘beta-logit’ model indicate that it is difficult to detect the influence of unobserved heterogeneity on the aggregate hazard function for strike duration.

AN ECONOMETRIC ANALYSIS OF FLUCTUATIONS IN AGGREGATE LABOR SUPPLY AND DEMAND

This paper contains an equilibrium model of the labor market. The supply function allows f or temporal substitution in response to wage fluctuations, and the de mand function allows for adjustment costs. Two related issues are emp hasized: identification of supply and demand functions, and sources o f serial correlation in employment and real wages. When the supply an d demand shocks are AR(1) processes, the equilibrium process for empl oyment and real wages is a restricted VAR(2). The supply and demand f unctions are (locally) identified using only employment and real wage data. An illustrative application is presented, using U.S. data for 1948-71. Copyright 1988 by The Econometric Society.

Output and price level effects of monetary uncertainty in a matching model

Abstract Monetary uncertainty and information lags are put into a random matching model so that the resulting setting has some meetings in which producers are relatively informed and others in which consumers are relatively informed. For that setting, the ex ante socially optimal way to conduct trade is characterized. The optimum can display a variety of relationships between money and total output and the price level. While the price level is always sticky, even the direction of its response and that of total output depend on the magnitude of the lag and on subtle features of the serial correlation properties of the money supply.

Theories of Bargaining Delays

Contract negotiations over wages are sometimes accompanied by strikes; similarly in legal contexts, settlements of damage claims may require lengthy negotiations. These and other costly delays in resolving disputes are the subject of the studies described in this article. Formulations in terms of game theory indicate that procedural features can allow delays, but the main cause may be informational disparities between the parties. Several models are described and related to data about strikes.

Bonding and the enforcement of labor contracts

Abstract Bonded contracts are a perfect substitute for legally enforceable contracts, if capital markets are perfect. This idea is applied to labor market contracts involving specific training.

Modeling Individual Migration Decisions

Migration economics is a dynamic, fast-growing research area with significant and rising policy relevance. While its scope is continually extending, there is no authoritative treatment of its various branches in one volume. Written by 44 leading experts in the field, this carefully commissioned and refereed Handbook brings together 28 state-of-the-art chapters on migration research and related issues.

Repeated contract negotiations with private information

Abstract Labor contracts are repeated, and the current negotiation apparently affects negotiations on the next contract. There is evidence that the likelihood of a strike is influenced by what happened before the previous contract was signed. To analyze whether private information might explain this, a model of negotiations between a buyer and a seller is developed where the “pie” in each contract follows a Markov chain, with transitions observed privately by the buyer. Each negotiation is a sequence of offers by the seller; the buyer can only accept or reject each offer, and a contract is signed when the buyer accepts.